On June 24, U.S. Sens. Christopher Coons, D-Del., and Jerry Moran, R-Kan.; U.S.
Reps. Ted Poe, R-Texas-02, and Mike Thompson, D-Calif.-05; and their co-sponsors
re-introduced legislation to broaden the definition of qualifying income for
master limited partnerships (MLPs) to include renewable and alternative sources
of energy, such as solar power.
This bipartisan MLP Parity Act (S.B.1656,
H.B.2883), originally introduced in early 2013, aims to have the definition of
qualifying income for MLPs include renewable and alternative sources of energy
such as wind, closed- and open-loop biomass, geothermal, municipal solid waste,
hydropower, marine and hydrokinetic energy, and fuel cells.
One of the key benefits of the MLP structure is that it is a publicly traded
partnership combining the tax advantages of a partnership with the
capital-raising and liquidity advantages of a publicly traded
corporation.
Although a majority of Republicans and Democrats support an
"all of the above" energy strategy, the largest component of the MLP universe
has historically been MLPs that are focused on midstream oil-and-gas activities
(i.e., pipelines). This is because midstream MLPs, with their mature business
models that depend largely on long-term take-or-pay contracts for the
transportation of hydrocarbons, are able to support the steady stream of cash
distributions that income-oriented MLP investors demand.
The MLP Parity
Act aims to level the playing field by extending MLP benefits to the alternative
energy industry; supporters such as Sen. Coons note that the federal government
should not be in the business of picking winners and losers in the energy
market.
The act would require a powerful tweak to the federal tax code in
that it would expose renewables and alternative sources of energy to significant
private capital in the energy market. Note that only the transportation and
storage of alternative fuels, such as ethanol and biodiesel, were added to the
list of qualifying income in 2008 (more on this below).
Solar companies
would benefit from the lack of "double taxation" with the MLP structure because
income "passes through" to investors and is taxed at the individual investor
level. The resulting lower tax burden means that, for a given level of risk in
its underlying assets, operations and financing arrangements, a solar MLP would
have a lower cost of capital than would a similar risk under a C-corporation
structure.
In essence, a solar business with the MLP structure would have
more financial flexibility, which would be supportive of distribution growth to
MLP investors.
However, opponents of the MLP Parity Act might argue that
this added financial flexibility to support growth may prove difficult for
alternatives and renewables because many of the alternative energy technologies
considered by the act are far less mature and inherently more risky. However,
given inherent geopolitical risks associated with crude oil production, it may
prove appealing to MLP investors seeking socially responsible investments.
The U.S. Energy Information Administration noted in its 2014 annual energy
outlook that solar and wind energy are expected to remain the primary sources of
renewable capacity growth in the U.S. going forward, given the limitations
associated with geothermal, waste and biomass resources.
We believe this
will be one of the key investment considerations should the MLP Parity Act make
its way into the tax code. Additionally, other attractive factors include the
expectation that solar technologies will achieve cost reductions - which, along
with a larger resource base, could result in higher growth than other renewables
under favorable conditions.
Note that the Internal Revenue Service's
definition of allowable income for MLPs has been in existence for decades.
Congress, worried that many corporations would convert to MLPs in order to gain
access to cheaper capital and avoid corporate taxes, sought to limit conversions
by passing legislation in 1987 that prescribed the type of income that a
publicly traded partnership could earn while maintaining its pass-through tax
status.
Congress' list of allowable or "qualifying" income included
dividends, interest, rents, capital gains and income from natural
resources-related activity. Originally, "natural resources" meant resources that
are depletable under Section 613 of the Federal Tax Code (26 U.S. Code Section
613), such as oil, natural gas, coal and timber.
The MLP Parity Act
enjoys bipartisan support, but with broader tax reform remaining an oft
talked-about possibility on Capitol Hill and the 2016 presidential election fast
approaching, prospects for its passage remain uncertain.
